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Holding Back on Luxe

One of the defining trends of the retail industry in the past decade has been a great hollowing out of the middle. Mid-tier chains have struggled or disappeared entirely. Discounters — exemplified by Wal-Mart — have thrived at one end of the spectrum and luxury chains have seen exploding sales and growth at the other end.

So how do things look on the upper end for the holidays?

The answer gets a bit complicated. To date in 2007, luxury chains have remained retail stars. Luxury department store chains have averaged same-store sales gains of 8.6 percent per month this year — higher than either 2005 or 2006. With the exception of June — when sales grew just 1.8 percent — the sector has soared. Such stores posted double-digit percentage increases in each of the first three months of the year. Even in April, when, as a whole, retail same-store sales dropped 1.9 percent, luxury department store chains posted gains of 4.3 percent. In August, luxury sales posted same-store gains of 8.2 percent.

Still, there are concerns. The ICSC figures only include luxury department stores and do not include smaller specialty stores. Those retailers saw more of a dip, according to Milton Pedraza, CEO of New York-based Luxury Institute, which monitors luxury spending trends.

“With all the uncertainty, all the bad news we got in July and August, there was an abrupt slowdown in the luxury sector in September,” he says. Moreover, in a possibly telling sign that luxury chains are expecting a slow holiday shopping season, retailers put a hold on orders from fashion houses, including Hugo Boss, Gucci and Versace, according to a report in the New York Post.

A big reason for the slowdown may be the troubled middle class, not the rich. Middle-class consumers, whose incomes range from approximately $30,000 to $80,000 a year, accounted for as much as 70 percent of luxury purchases at some chains, according to Michael J. Silverstein, a Chicago-based senior partner with the Boston Consulting Group, an international strategy and consulting firm.

Analysts divide luxury into two categories — -true luxury, represented by chains like Hermès, which cater exclusively to the uber-wealthy, and more affordable brands like Coach, which target both wealthy and middle-income consumers. Retailers who cater exclusively to the superrich will continue to see strong growth, while stores that aspire to the label of luxury will suffer, notes Jay McIntosh, director of retail and consumer products with Ernst & Young. Going forward, analysts express confidence that the luxury sector will continue to enjoy healthy gains, though they have revised their annual growth projections from 8 percent to a low of 5 percent.

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